It is important to have FTA with UK
Established in 1958, the Northern India Textile Mills' Association (NITMA) is a non-profit body solely engaged in helping promote the interests of the Indian textiles industry not only in the northern part as the name suggests but also in central and western states of the country. Many of the large, medium and small textile industries located in northern India are associated with NITMA with a combined turnover of more than ₹50,000 crore and represents approximately 20 per cent of textile production capacity. President Sanjay Garg discusses with Rajesh Kumar Shah the current situation and the issues facing the Indian textiles industry, particularly the north Indian textile mills.
It is now more than two years since the introduction of the goods and services tax (GST). Have things become simpler? How has GST affected the textiles industry?
The GST has certainly affected the industry in more than one way. First, of course, is bringing one segment of the textiles industry under the GST ambit, which was not there earlier. Second, the compliance cost for GST has proven to be a cumbersome process. The GST Council has been making efforts to simplify the process, but we are quite far from it. Last, a huge amount of working capital has got blocked in the processing, fabrics and garments industry which has an inverted duty structure. This blocking of funds is mainly in the MSME sector, where extensively job working services are availed for stitching, knitting, weaving printing, embroidery, common effluent services, etc. Despite refund of inverted duty being allowed, due to the job working being categorised as services, the reality is that no refund is coming, and hence the same is being passed on to next person in the chain making the overall cost structure of Indian textiles expensive and impacting exports and leading to more imports. Industry has been seeking a simplified and more convergent GST rates with fewer slabs and lifting of the long-term capital gains tax to boost disposable incomes that would help revive consumption.
What are your expectations from the proposed National Textiles Policy?
Industry has been looking forward to a long overdue, new textiles policy which will help in building India as a textiles and clothing sourcing hub for the whole world.
The ministry of textiles is in the process of formulating the new National Textiles Policy with a vision to achieve an ambitious target of $350 billion market size for the Indian textiles and clothing industry from the current level of $150 billion by 2025 and $650 billion by 2030. In order to achieve these targets, the industry has to be globally competitive in all aspects of the textiles value chain with respect to the global trends in textile manufacturing. Businesses need to be re-strategised for manufacturing innovative sustainable products to cater to the continuously evolving consumer demands.
Globally, innovation is the new buzzword in the industrial and manufacturing sector. The textiles industry should go for continuous innovation in products and processes with focused R&D since consumers today not only demand aesthetically appealing products but also look for enhanced functionality in their usage. Buyers today are looking for newer and more innovative sustainable products.
A mega exhibition Textiles India 2017 was organised by the government to showcase the entire textile value chain of India. What more should the government do to increase exposure of Indian textiles?
The Indian textiles industry showed tendency to grow during the initial stage of economic development. When per capita income is low, industry has high chances of growth and creates employment for masses. With increase in per capita income, wages also rise leading to a decline in overall cost competitiveness resulting in the industry shifting its manufacturing location to another cost-competitive location. Given the per capita income of India at about $2,000 per year, the textiles and clothing industry offers great opportunity for employment creation for about 8-10 years, when India's per capita may increase beyond $8,000 per year.
The central issue affecting manufacturing of textiles and clothing products in India and increasing exports is related with cost-competitiveness, which is low at present. This results in India's lower share in the global textiles and clothing trade, along with threats of imports from competitive countries like China and Bangladesh. In addition, market entry barriers like non-availability of duty-free market access in major consuming markets like the US and the EU are some of the issues which are hurting industry.
The policy decisions required to promote textile and clothing exports are:
Micro study to identify textile and clothing products where India's exports are low / absent: Based on the assessment of the export profile of textiles and clothing, such products should be identified where India's share in world trade is very low or absent. The causes of the same should be diagnosed and accordingly special clusters need to be developed where all such facilities are provided, which are required for the growth of these products' exports from India.
Textile / apparel specific cluster / infrastructure developments: The textiles and apparel industry has grown in clusters in the country over the years and some of these clusters have been losing their competitiveness due to manifold reasons. A separate study to understand their problem needs to be carried out. It is also pertinent to note that the effectiveness of the existing textile parks set up in the country should also be evaluated to measure the gains made by the industry. Such a study can also identify shortcomings in bringing desired results to take necessary corrective action.
Custom clearance processes should not entail much time as being done at present: Suitable initiatives must be taken to expedite custom clearance like strengthening physical infrastructure and simplification of processes.
Labour laws reforms: Specific reforms are required in labour laws such as flexibility in working hours and overtime hours.
Skilling potential workers especially in rural areas: India has a large workforce, which is unemployable due to the inadequacy of proper skilling / training. It is suggested that funds under rural development schemes or MNREGA may be allowed for imparting training to such workers in rural areas.
Improving market access by expediting FTA with EU on priority basis: India's textiles and clothing exports suffer from serious market access problems due to tariff preferences enjoyed by competing countries like Bangladesh, Vietnam and Pakistan. Therefore, India should expedite the process of FTA with the EU on a priority. Based on global apparel sourcing firms' feedback, an FTA with EU will increase investment in India's textiles industry, especially in the apparel sector, and create lakhs of jobs.
Interest rates have come down in recent years. How is this helping textile mills in the North?
Visibly, it is the same as before.
To what extent has the US-China trade war benefited the Indian textiles industry? Has any strategy been worked out to capitalise on the opportunities that may have cropped up?
The US and China are the first two ranked economic powers of the world. Once the US imposed a higher tariff for Chinese exports up to 24.3 per cent after June 2019, some imbalance crept into the global economy order. The smooth trade in global markets was affected.
Likewise, with the beginning of the trade war, our export of yarn to the Chinese market reduced by 50 per cent. The yarn that was not exported to China became a surplus quantity in the domestic market, resulting in a trade imbalance. The reduction in demand increased the inventory of finished goods with manufacturers, blocking their working capital. This is one of the major causes that has been forcing the industries to curtail their production. This has also resulted in employees living with a fear of losing their jobs, as some of them are receiving delayed wages while some others experiencing a sizable cut in their average earnings per month.
The ongoing US-China trade war has slowed growth in the EU and the lack of nominations to the appellate body of the World Trade Organization (WTO) are behind the global trade slowdown. As per a report, India's low participation in regional trade agreements (RTAs) is seen as the reason for its low free trade agreement (FTA) utilisation. The government should set up a market facilitation cell to help Indian industry diversify export markets and products and develop a mechanism to leverage and navigate RTAs.
As per official data, a total of 1.19 crore preferential certificates of origin were issued from 2005-06 to 2018-19, amounting to a total trade of $307.04 billion. This is a low number compared to India's total trade and this includes generalised system of preferences (GSP) certificates. In 2018-19, the total trade through the preferential route was only $32.22 billion, which is less than 10 per cent of India's total exports in 2018-19, according to the report. India has not signed any new FTAs since 2012.
India has pulled out of Regional Comprehensive Economic Partnership (RCEP). With other FTAs not likely to come sooner, what should the industry and the government do to help the Indian textiles industry withstand global competition?
Trade is the lifeblood of the world economy. We all know that. The share of global trade grew from around 10 per cent of the global GDP to close to 60 per cent by the 2010s. And, those countries which grew their share of the global trade benefited from the huge multiplier effect on their economy. Given this context, India's decision to withdraw from the RCEP, designed to be the world's largest trading bloc, was a landmark decision, notwithstanding official comments that we will rejoin if our concerns are addressed.
This decision has both passionate supporters and sceptics. The former group agrees with the government's 'strong' decision based on the rationale that the conditions being negotiated for joining the RCEP would have been detrimental for Indian industry. The opposing logic is that by withdrawing, we would actually be disadvantaging Indian industry in terms of preferential access to the largest and the fastest growing markets. So, who is right?
To answer this question, let us look at the data from past FTAs and their impact on competitive positioning of Indian industry in global trade. In the last decade and a half, India has signed three regional FTAs-with South Asia, ASEAN, and Mercosur (the trading bloc of Latin American countries). The other FTAs have been bilateral agreements with individual countries.
Of the three regional FTAs, in only the South Asian FTA (Afghanistan, Bangladesh, Bhutan, India, Nepal, Sri Lanka, Pakistan, and Maldives) did India increase its exports faster than imports. This is understandable given the member countries. In case of both the ASEAN and Mercosur FTAs, India's trade deficit with these two regions has increased.
For example, after signing of the India-ASEAN FTA in 2010, trade between India and the ASEAN increased from $52.6 billion to $64.6 billion in 2016. However, ASEAN countries benefited more, with India's trade deficit increasing from less than $8 billion in 2009-10 to about $22 billion in 2018-19. Similarly, after signing of the India-Mercosur FTA in 2009, India's exports grew from $2.31 billion in 2009 to $3.14 billion in 2016, but its imports grew faster-from $5.34 billion to $11.46 billion in the same period. This data, thus, supports the government's view that the RCEP will be harmful to India's interests unless carefully calibrated and negotiated.
Now let us look at data supporting the logic of the critics of the RCEP pullout, who claim that this will disadvantage Indian exporters by denying them preferential access to large markets. Let us use the example of apparel exports, which has been a focus industry for Indian policymakers for many years given the potential of its high labour-intensity to generate millions of new jobs.
While India's share in global apparel trade has stagnated at around 4 per cent, that of competing countries like Bangladesh, and even Vietnam, which entered the global market much later, has leapfrogged ahead of India's. This, despite the potential advantages India has in terms of higher scale from larger local market, domestic supply of cotton and synthetic yarn, and large pool of labour.
In a BCG study of India's competitive position in the sector, we found that Indian exporters face a cost disadvantage of 14-15 per cent for exports to the EU compared to Bangladesh. What is interesting to note is that over 60 per cent of this gap is explained by preferential access to the EU market because of Bangladesh's FTA with the EU. The balance cost gap is driven by a variety of domestic structural, regulatory / policy, and productivity factors.
For example, the scale of an average Indian clothing plant is much smaller than that in Bangladesh due to restrictive labour laws (to be fair to the government, they have tried to partially address the labour issue for the textiles industry, but much more needs to be done). This gives a cost penalty to the average Indian apparel exporter. India has tried to incentivise exports to overcome some of these structural gaps with several export promotion schemes, but the recent ruling by WTO against India on a complaint by the US has put the future of many of these incentives in doubt.
So, based on the data, the views on both joining and quitting RCEP have a strong rationale. And, one can argue that the government took a pragmatic decision as it did not want a similar increasing-deficit story repeated with the new regional treaty, especially given the fear of being swamped by exports from China.
Unfortunately, this decision also highlights the lack of global competitiveness in many sectors of Indian industry-even with smaller developing countries, given the experience with the ASEAN and Mercosur FTAs. India has rightly been focusing on ease of doing business (EoDB) as critical to build competitiveness and attract FDI.
It is equally critical to focus and improve the high cost of doing business (CoDB), which broadly has three components: higher factor costs (land, industrial power, productivity-linked labour, financing), higher cost of compliance with government regulations, and high logistics costs from both hard and soft infrastructure (e.g. time taken by processes at ports). And, unless we annually benchmark and improve the CoDB as we are doing for EoDB, our manufacturing industry, especially compared to our peer developing countries, will continue to be threatened by FTAs rather than seeing them as windows of opportunities.
Clearly, FTAs are a double-edged policy sword for India. If wielded right, they can open up large markets and drive growth of exports (and push up GDP). They also put pressure on the domestic industry to become more globally competitive. If wielded badly, i.e., without the policies to improve CoDB, they can be equally harmful to the domestic economy.
Countries that have done it right have ensured that their trade, investment and industrial policies are well-aligned. They calibrate the opening of the domestic market with the right industrial and investment policies to structurally improve the competitiveness of the domestic industry. The industry, in turn, has to match these enabling policies with a strong effort to improve productivity and invest in innovation to increase global competitiveness, rather than complaining of cheaper imports flooding the country. Otherwise, India will continue to be ambivalent about FTAs and struggle to become the next highly competitive manufacturing engine of the world.
How important is the UK market for Indian textiles? Is Brexit going to change the equation?
It is important to have an FTA with the UK after Brexit. Various textile bodies have urged international buyers to push their governments to sign an FTA with India. Because of the quality goods exported from India, many UK buyers have agreed to take up the matter with their government. An umbrella federation of nationwide textile associations has been formed in New Delhi and industry has decided to put pressure on the Central government to act in favour of signing FTAs soon.
Some existing schemes like Merchandise Exports from India Scheme (MEIS) are being withdrawn due to a WTO ruling against India's export subsidies. How will this affect the textiles industry?
As per official and trade sources, the government has decided to defer the introduction of a ₹50,000 crore exports programme-which was supposed to replace its flagship, but WTO-incompatible, MEIS-to the next fiscal from the proposed date of January 1, 2020.
Commerce minister Piyush Goyal is said to have acceded to exporters' request to grant them more time to prepare for a transition from the MEIS to the new scheme called Remission of Duties and Taxes on Export Product (RoDTEP), given the operational challenges. Also, the next foreign trade policy, which will contain broad contours of the RoDTEP, will only be rolled out from April 2020, as the current one is in effect up to March. The new scheme is supposed to reimburse all taxes and duties paid on inputs consumed in exports in sync with WTO norms. Since the potential revenue forgone in the current MEIS is around ₹40,000 crore a year, the RoDTEP is expected to cost the government an additional ₹10,000 crore annually.
The decision to defer the RoDTEP rollout comes at a time when the WTO's appellate body remains paralysed. So, India is spared the trouble of having to fast restructure some of its contentious trade schemes, as its November 2019 appeal against a ruling of the WTO's Disputes Settlement Body (DSB) in favour of the US against New Delhi's export "subsidies" is still pending. The fate of all such appeals remains uncertain, as the US has refused to relent on its move to block the appointment of appellate members. According to the WTO rules, unless appeals are heard and settled, the findings of the DSB won't be binding on the losing party. The rollout of the RoDTEP from January 2020 was one of a slew of measures-including easier priority-sector lending norms for exports, greater insurance cover under Export Credit Guarantee Corporation (ECGC) and lower premium for MSMEs to avail of such cover-announced by the government in September to help reverse a slide in exports.
Though the GST regime has subsumed a plethora of levies, some still exist. Petroleum and electricity are still outside the GST ambit, while other levies like mandi tax, stamp duty, embedded Central GST and compensation cess, etc, remain unrebated.
The MEIS, exporters have persistently complained, doesn't offset all the taxes; so the new scheme will be beneficial to them when it is implemented.
The proposed transition to the new scheme came after the US dragged India to the WTO, claiming that New Delhi had offered illegal export subsidies and "thousands of Indian companies are receiving benefits totalling over $7 billion annually from these programmes". However, Indian officials have rejected such claims and repeatedly stated that the entire allocation or potential revenue forgone on account of various such schemes (including MEIS) doesn't qualify as export subsidies, as in most cases, they are meant to only soften the blow of imports that exporters have been forced to bear due to a complicated tax structure. Exports are supposed to be zero-rated, in sync with the best global practices, they have argued.
In recent years, the Indian rupee is slowly and steadily depreciating vis-à-vis the US dollar. Are exporters able to take any advantage of this trend?
First, it has caused a drop in domestic consumer purchasing power. The Indian domestic market is very huge and had helped absorb big market upheavals on earlier occasions. But after the high-value currency devaluation, the scenario is totally different with an extra cautious approach by every trader / manufacturer. The purchasing power of the people has dropped to a low level. Though the availability of the textile commodity is huge, the purchasing power of Indians has reduced.
The rupee has been spooked by a combination of global and domestic factors. It has depreciated nearly 3.5 per cent in a matter of a few sessions to hit an eight-month low. On the domestic front, policy flip-flops pertaining to the issue of sovereign foreign currency bonds and super-rich surcharge for (foreign portfolio investments) FPIs has induced an uncertainty. It has resulted in outflows from domestic equity markets. On the global front, the escalation in the trade war between the US and China has dampened risk sentiment and outlook for global growth. This has resulted in unwinding of carry trades and flight of capital from riskier emerging market (EM) assets to safe havens such as US treasuries and gold.
The People's Bank of China (PBoC) responded to fresh tariffs by letting the yuan depreciate. USD/CNY broke the psychological 7 level. The rupee and other EM currencies have closely tracked the yuan. The reaction function of the RBI seems to indicate that it is not too perturbed letting the rupee depreciate in a calibrated manner in real effective exchange rate (REER) terms. The 36-country REER has corrected to 115 from 120. For quite some time, the CNY/INR traded in the 9.95-10.05 band and now the rupee has depreciated beyond the 10.10 mark against the yuan. In a way, a more competitive rupee would help reinvigorate exports and also domestic manufacturing by reducing the import of cheap substitutes. The adjustment in rupee is therefore welcome.
The government is envisaging India to become a $5 trillion economy by 2024-25. Do you see it happening? What will be the contribution of the textiles industry?
India's potential to achieve a $5 trillion GDP by 2024-25 is within the realm of possibility, we believe. A while back, the commerce and industry ministry also came out with a blueprint suggesting a host of long and short-term measures to increase the size of India's economy to $5 trillion by 2025. According to its report, the agriculture and manufacturing sectors can contribute $1 trillion each, while the contribution from the services sector has been pegged at $3 trillion.
As far as the textiles value chain is concerned, the domestic textiles and apparel industry contributes 2.3 per cent to India's GDP and accounts for 13 per cent of industrial production, and 12 per cent of the country's export earnings. It is the second-largest employer in the country providing employment to 45 million people. It is expected that this number will increase to 55 million by 2020.
FDI in the textiles and apparel industry reached $3.1 billion during 2018-19. Exports in the textiles and apparel industry are expected to reach $300 billion by 2024-25 resulting in a tripling of the Indian market share from 5 per cent to 15 per cent.
The textiles and garments industry in India is expected to reach $223 billion by 2021 from $137 billion in 2016. The industry has strengths across the entire value chain from fibre, yarn, fabric to apparel. It is highly diversified with a wide range of segments ranging from products of traditional handloom, handicrafts, wool and silk products to the organised textiles industry. The organised textiles industry is characterised by the use of capital-intensive technology for mass production of textile products and includes spinning, weaving, processing, and apparel manufacturing. The domestic textiles and apparel industry stood at $140 billion in 2018 (including handicrafts) of which $100 billion was domestically consumed while the remaining portion worth $40 billion was exported to the world market.
Further, the domestic consumption of $100 billion was divided into apparel at $74 billion, technical textiles at $19 billion and home furnishings at $7 billion. While textile exports earned $20.5 billion, apparel exports fetched $16.1 billion, and handlooms $3.8 billion.
